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1 Why Business Plans Don t Get Funded Your business plan is very o en the first impression poten al investors get about your venture. But even if you have a great product, team, and customers, it could also be the last impression the investor gets if you make any of these avoidable mistakes. About The Author Akira Hirai is the founder and CEO of Cayenne Consul ng, a firm that has helped hundreds of entrepreneurs prepare for the fund raising process by cra ing strategies, business plans, financial forecasts, and pitch decks. Akira started two technology companies in Silicon Valley during the dot com bubble. His previous experience has spanned investment banking, management consul ng, so ware engineering, and sales management. He earned his A.B. in Engineering Sciences at Harvard University. Akira Hirai Cayenne Consul ng Investors see thousands of business plans each year, even in this down market. Apart from a referral from a trusted source, the business plan is the only basis they have for deciding whether or not to invite an entrepreneur to their offices for an ini al mee ng. With so many opportuni es, most investors simply focus on finding reasons to say no. They reason that entrepreneurs who know what they are doing will not make fundamental mistakes. Every mistake counts against you. This ar cle shows you how to avoid the most common errors found in business plans. CONTENT MISTAKES Failing to relate to a true pain Pain comes in many flavors: my computer network keeps crashing; my accounts receivable cycle is too long; exis ng treatments for a medical condi on are ineffec ve; my tax returns are too hard to prepare. Businesses and consumers pay good money to make pain go away. You are in business to get paid for making pain go away. Pain, in this se ng, is synonymous with market opportunity. The greater the pain, the more widespread the pain, and the be er your product is at allevia ng the pain, the greater your market poten al. A well wri en business plan places the solu on firmly in the con-text of the problem being solved. Value infla on Phrases like unparalleled in the industry; unique and limited opportunity; or superb returns with limited capital investment taken from actual documents are nothing but asser ons and hype.

2 Investors will judge these factors for themselves. Lay out the facts the problem, your solu on, the market size, how you will sell it, and how you will stay ahead of compe tors and lay off the hype. Trying to be all things to all people Many early-stage companies believe that more is be er. They explain how their product can be applied to mul ple, very different markets, or they devise a complex suite of products to bring to a market. Most investors prefer to see a more focused strategy, especially for very early stage companies: a single, superior product that solves a troublesome problem in a single, large market that will be sold through a single, proven distribu on strategy. That is not to say that addi onal products, applica ons, markets, and distribu on channels should be discarded instead, they should be used to enrich and support the highly focused core strategy. You need to hold the story together with a strong, compelling core thread. Iden fy that, and let the rest be suppor ng characters. No go to market strategy Business plans that fail to explain the sales, marke ng, and distribu on strategy are doomed. The key ques ons that must be answered are: who will buy it, why, and most importantly, how will you get it to them? You must explain how you have already generated customer interest, obtained pre-orders, or be er yet, made actual sales and describe how you will leverage this experience through a cost-effec ve go-to-market strategy. We have no compe on No ma er what you may think, you have compe tors. Maybe not a direct compe tor in the sense of a company offering an iden cal solu on but at least a subs tute. Fingers are a subs tute for a spoon. First class mail is a subs tute for . A coronary bypass is a subs tute for an angioplasty.

3 Compe tors, simply stated, consist of everybody pursuing the same customer dollars. To say that you have no compe on is one of the fastest ways you can get your plan tossed investors will conclude that you do not have a full understanding of your market. The Compe on sec on of your business plan is your opportunity to showcase your rela ve strengths against direct compe tors, indirect compe tors, and subs tutes. Besides, having compe tors is a good thing. It shows investors that a real market exists. Too long Investors are very busy, and do not have the me to read long business plans. They also favor entrepreneurs who demonstrate the ability to convey the most important elements of a complex idea with an economy of words. An ideal execu ve summary is no more than 1-3 pages. An ideal business plan is pages (and most investors prefer the lower end of this range). Remember, the primary purpose of a fund-raising business plan is to mo vate the investor to pick up the phone and invite you to an in-person mee ng. It is not intended to describe every last detail. Document the details elsewhere: in your opera ng plan, R&D plan, marke ng plan, white papers, etc. Too technical Business plans especially those authored by people with scien fic backgrounds - are o en packed with too many technical details and scien fic jargon. Ini ally, investors are interested in your technology only in terms of how it:: solves a really big problem that people will pay for; is significantly be er than compe ng solu ons; can be protected through patents or other means; and can be implemented on a reasonable budget.

4 All of these ques ons can be answered without a highly technical discussion of how your product works. The details will be reviewed by experts during the due diligence process. Keep the business plan simple. Document the technical details in separate white papers. No risk analysis Investors are in the business of balancing risks versus rewards. Some of the first things they want to know are what are the risks inherent in your business, and what has been done to mi gate these risks. The key risks of entrepreneurial ventures include: Market risks: Will people actually buy what you have to sell? Will you need to create a major change in consumer behavior? Technology risks: Can you actually deliver what you say you can? On budget and on me? Opera onal risks: What can go wrong in the day-to-day oper-a ons of the company? What can go wrong with manufacturing and customer support? Management risks: Can you a ract and retain the right team? Can your team actually pull this off? Are you prepared to step aside and let somebody else take over if necessary? Legal risks: Is your intellectual property truly protected? Are you infringing on another com-pany s patents? If your solu on does not work, can you limit your liability? This is, of course, just a par al list of risks. Even though you may feel that the risks are negligible, poten al investors will feel other-wise unless you demonstrate that you have given a lot of thought to what can go wrong and have taken prudent steps to mi gate these risks. Poorly organized Your idea should flow in a nice, organized fashion. Each sec on should build logically on the previous sec on, without requiring the reader to know something that is presented later in the plan.

5 Although there is no single correct business plan structure, one successful structure is as follows: Execu ve Summary: This is a brief, 1 to 3 page summary of every-thing that follows in the plan. It should be a stand-alone docu-ment, as many readers will make their ini al decision based on the execu ve summary alone. This should usually be wri en last; otherwise, you have nothing to summarize! Background: If you are in a highly specialized field, you should provide some background in layman terms since most investors will not have advanced degrees in your field. Market Opportunity: Describe how businesses and consumers are suffering, and how much they are willing to pay for a solu on. Products or Services: Describe what you do, and how your solu on fits into the market opportunity. Market Trac on: Describe how you have succeeded in a rac ng customers, marke ng and distribu on partnerships, and other alliances that demonstrate that experts in your market are be ng on your solu on. Compe ve Analysis: Iden fy your direct and indirect compe tors, and describe how your solu on is be er. Distribu on and Marke ng Strategy: Describe how you will go to market, how you will price your products, etc. Risk Analysis: Iden fy major sources of risks, and describe how you are mi ga ng them. Milestones: Showcase a strong past track record, and describe key checkpoints for the future. Company and Management: Provide the basic facts about your company where and when you incorporated, where you are located, and brief biographies of your core team. Financials: Provide summaries of your P&L and cash flows, and the assump ons used to come up with these. Also describe your funding needs, how you will use the proceeds, and possible exit strategies for investors. As stated earlier, there is no right structure you will need to experiment to find the one that best suits your business. FINANCIAL MODEL MISTAKES

6 Forge ng Cash Revenues are not cash. Gross margins are not cash. Profits are not cash. Only cash is cash. For example, suppose you sell something this month for $100, and it cost you $60 to make it. But you have to pay your suppliers within 30 days, while the buyer probably won t pay you for at least 60 days. In this case, your revenue for the month was $100, your profit for the month was $40, and your cash flow for the month was zero. Your cash flow for the transac on will be nega ve $60 next month when you pay your suppliers. Although this example may seem trivial, very slight changes in the ming difference between cash receipt and disbursement just a couple of weeks can bankrupt your business. When you build your financial model, make sure that your assump ons are realis c so that you raise sufficient capital. Lack of Detail Your financials should be constructed from the bo om-up, and then validated from the topdown. A bo om-up model starts with details such as when you expect to make certain sales, or when you expect to hire specific employees. Top-down valida on means that you examine your overall market poten al and compare that to the bo om-up revenue projec ons. Round numbers like one million in R&D expenses in Year 2, and two million in Year 3 are a sure sign that you do not have a bo om-up model. Unrealis c financials Only a very small handful of companies achieve $100 million or more in sales only five years a er founding. Projec ng much more than that will not be credible, and will get your business plan canned faster than almost anything else.

7 On the other hand, a business with only $25 million in revenues a er five years will be too small to interest serious investors. Financial forecasts are a litmus test of your understanding of how venture capitalists think. If you have a realis c basis for projec ng $ million in Year 5, you are probably a good candidate for venture financing. Otherwise, you should probably look elsewhere. Insufficient financial projec ons Basic financial projec ons con-sist of three fundamental elements: Income Statements, Balance Sheets, and Cash Flow Statements. All of these must conform to Generally Accepted Accoun ng Principles, or GAAP. Investors generally expect to see five years of projec ons. Of course, nobody can see five years into the future. Investors primarily want to see the thought process you employ to create long-term projec ons. A good financial model will also include sensi vity analyses, showing how your projected results will change if your assump ons turn out to be incorrect. This allows both you and the investor to iden fy the assump ons that can have a material effect on your future performance, so that you can focus your energies on valida ng those assump ons. They should also include bench-mark comparisons to other companies in your industry things like revenues per employee, gross margin per employee, gross margin as a percentage of revenues, and various expense ra os (general and administra ve, sales and marke ng, research and development, and opera ons as a percentage of total opera ng expenses). Conserva ve assump ons Nobody ever believes that assump ons are conserva ve, even if they truly are. Develop realis c assump- ons that you can support, refrain from using the words conserva ve or aggressive in your plan, and leave it at that. Offering a valua on Many business plans err by sta ng that their company is worth a certain amount. How do you

8 know? The value of a company is determined by the market by what others are willing to pay and unless you are in the business of buying, selling, or inves ng in companies, you probably don t have an acute sense of what the market will bear. If you name a price, one of two things can happen: (a) your price is too high, and investors will toss your plan; or (b) your price is too low, and investors will take advantage of you. Both are bad. The purpose of the business plan is to tell your story in the most compelling manner possible so that investors will want to go to the next step. You can always nego ate the price later. STYLISTIC MISTAKES Poor spelling and grammar If you make silly mistakes in your business plan, what does that say about how you run your business? Use your spelling and grammar checkers, get other people to edit the plan, do whatever it takes to purge embarrassing errors. Too repe ve All too o en, a plan covers the same points over and over. A well-wri en plan should cover key points only twice: once, briefly, in the execu ve summary, and again, in greater detail, in the body of the plan. Appearance ma ers At any point in me, an investor has dozens if not hundreds of plans wai ng to be read. Get to the top of the pile by making sure that the cover is a rac ve, the binding is professional, the pages are well laid out, and the fonts are large enough to be easily read. On the other hand, don t go too far you don t want to give the impression that you are all style and no substance. EXECUTION MISTAKES Wai ng un l too late

9 The capital forma on process takes a long me. In general, count on 6 months to a year from the me you start wri ng the plan un l the me the money is in the bank. Don t put it off. Your management team should be prepared to in-vest about 500 hours into the plan. If you are too busy building your product, company, or customers (which is arguably a be er use of your me), consider outsourcing the development of the business plan. Failing to seek outside review Make sure that you have at least a few people review your plan before you send it out preferably people who understand your market, sales and distribu on strategies, the VC market, etc. Your plan may look perfect to you and your team, but that s probably because you ve been staring at it for months. Good, objec ve reviews from outsiders with a fresh perspec ve can save you from myopia. Overtweaking You could spend countless hours tweaking your plan in the pursuit of perfec on. A lot of this me would be be er spent working on your product, company, and customers. At some point, you need to pull the trigger and get the plan out in front of a few investors. If the reac on is posi ve, and they want to move forward, great. If the reac on is nega ve (assuming that the investor was a good fit to begin with), then you may have been heading down the wrong path. Get feedback from a couple of investors, and if a general consensus emerges, go back and refine your plan. Conclusion It s a tough investment climate, but good ideas backed by good teams and good business plans are s ll ge ng funded. Give yourself the best possible chance by avoiding these simple mistakes.

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